Credit Score: What Really Does and (Doesn’t) Matter

Credit Score: What Really Does and (Doesn’t) Matter

Your credit score can impact whether you’re approved to open credit cards in your name, or if you can secure student loans, auto financing or home loans at competitive rates. Your credit score may even determine whether you’re approved to rent an apartment or secure a job with certain employers.

Here’s a look at how which factors in your financial life play a role in how your credit score is calculated, and which aspects of it may never play a role in your credit score.

How Your Credit Scores Are Calculated

FICO and VantageScore are two of the most popular credit scores — but since many credit scores are industry-specific, you may have more than 50 possible credit scores. Those scores may vary slightly, but most are based on a few specific pieces of criteria, including:

• Payment history. Hopefully, you will never miss a payment. If you do, pay what you owe as soon as you realize the due date has passed. The longer your payment becomes past due and the more frequently you miss the payments, the more negatively they may impact your credit score. Missed payments could remain on your credit report for several years.

• Balances on your credit accounts. The amounts of your account balances are the second most important factor in your credit score calculation. High credit balances (compared to your available credit line) may cause lenders to believe you are a higher-risk borrower who is financially reliant on credit.

• The length of your credit history. The longer you’ve owned credit in your name, the more beneficial it may be to your credit score. The credit or loan accounts you’ve owned the longest may contribute the most to a positive credit score.

• New credit. If you apply for and/or open too many new accounts in a short period of time, it may negatively impact your credit score. (This is true even if you apply for a new credit card account at a store to receive a store discount, and never intend to use the card).

• Your credit mix. Credit cards are considered revolving credit: You are given a line of credit, and choose how much of it you use. Once you make a payment, you’ll have more available credit (up to your credit line). A car, student or home loan, is an installment account; you don’t have the ability to borrow more just because you’ve made a payment. Your credit score may be positively impacted when you own a mixture of both types of credit.

What Is (Usually) Not Included in Your Credit Score

Your credit score helps lenders, creditors, landlords and some employers see how much risk they might take on by doing business with you, based on how you’ve managed credit. When your credit history and credit scores are positive, you may be offered more competitive rates and terms on loans and credit products.

That said, a creditor or lender must report account information to the credit bureaus in order for it to appear on your credit history (which then factors into your credit score). For that reason, you may have financial accounts that will never show on credit report, including:

• Your debit card activity. A debit card draws funds from your bank account when you make a purchase. It is not a line of credit, and isn’t reported to the credit bureaus or included in your credit score.

• Monthly utility, rent or cellphone bills. Many utility providers or landlords will not report monthly account activity to a credit bureau — unless you don’t pay, and the account is turned over to a collections agency. (In turn, the collections agency may report the unpaid account to the credit bureaus, which could negatively impact your credit score).

• Your income. The income you earn is not included in your credit history, or part of your credit score.

• Your spouse’s credit activity (unless it’s on a shared/joint account). Your credit history (and credit score) is based on your social security number. Even if you get married, you maintain your own credit history and credit score.

Credit scores can be complicated, but when you separate the facts from the myths, you’re empowered to take the necessary steps to build a positive credit score. Use these basic tips to start taking control of your credit — and your financial life.

Author bio: Pamela Coleman is Executive Director of Furniture and Mattresses at Conn’s HomePlus, a 125-year-old consumer goods retailer headquartered in The Woodlands, Texas, with expertise in international and domestic buying, category management, product development and sourcing.

 

External sources:
https://www.credit.com/credit-scores/how-many-credit-scores-are-there/

5 factors that determine a FICO® Score


http://www.myfico.com/credit-education/improve-your-credit-score/

Getting Over Credit, Debt, And Other Horror Stories

When people think of credit and debt, their minds immediately go to the worse case scenarios of them. We’ve all heard ghost stories of how bad credit can drag you down and limit your options and how debt can become a spiral that can truly be very hard to climb out of. But the problem is that a lot of people focus on the negative consequences of these stories that they fail to consider just how helpful credit and debt can be. Here, we’re going to challenge the phobia and help you use credit and debt better.

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The sooner you come face-to-face with it, the better

There’s a significant portion of adults who have never once checked their credit report. Some of these people might not know to, others have chosen not to because they’re staying well away from credit as much as possible. However, even if your record is immaculate, your report might not be. You might have to repair your credit score by no fault of your own but because there are erroneous accounts on them. For instance, you might be getting bad reports based on accounts that are mistakenly tied to your name but aren’t yours. Or you might be up-to-date with all your payments but your creditors made a mistake in reporting that you missed a payment.

It’s the next step in a better financial life

When used responsibly, credit and debt are the steps you take to make some of the biggest financial decisions in your life. When you get a car, when you buy a house, when you start a business, the chances are you take out a loan for them. With better credit, which is built by taking debts responsibly, you have the chance to get the best discount auto loans and the best mortgages. Having no history of credit isn’t going to help you get better deals. You have no history of being a responsible debtor, after all. Only by building a healthy credit history can you get the best deals.

Credit cards aren’t the devil

Those pieces of plastic might be considered the single most dangerous aspect of credit. Yes, people get themselves into credit card debt they can’t handle by using it to make lifestyle purchases they otherwise couldn’t. But that debt can be used positively to build up your credit so long as you have pre-planned a budget to always keep on top of it. Debt management turns debt from a danger into a simple part of life. You can get rewards cards that turn credit card use into extra purchasing power, whether it’s through air miles or through grocery vouchers.

Wise use of credit and responsibility for debts can be one of the most effective financial tools at your disposal. It can improve your purchasing power and it can help you make some of the biggest financial decisions in your life. In any account, it’s important to come face-to-face with it so you make sure that it’s not marred by errors that could come back to haunt you.

Building a Firm Financial Foundation

Effectively administering your personal finances encompasses broad responsibilities, ranging from everyday budgeting to long-range concerns, such as retirement planning and preparing for a child’s higher education expenses.  For the best results finding security and stability, individual money managers start with solid footing, building upon each favorable financial outcome.  Without a consistent base, on the other hand, individual finances are vulnerable to damage and distress.

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Building a sturdy financial base begins early in life, as young adults transition from dependency, carving-out their own financial territories.  And the process continues for a lifetime, calling on effective money managers to remain proactive shaping positive financial outcomes.  Consider the following concerns, at the heart of your financial stability:

Use Strong Credit References to Support Your Financial Health

From your first financial interactions, your behavior handling money lays the groundwork for credit references, which follow you for a lifetime.  By setting-off on the right foot, you not only establish short-term credit references, but early success also puts building blocks in place on which to raise a strong financial structure.

Although it is a representation of your actual credit behavior, your credit score ultimately takes on a life of its own.  Beginning with your first credit card, car note, or revolving store account, credit reporting agencies monitor your behavior making good on debts and managing money matters.  Successful financial outcomes boost your score, while inconsistencies reduce your strength of credit.  Each circumstance is judged according to its particulars, so it is hard to generalize about the impact of credit mistakes.  Suffice to say, however, it doesn’t take many missteps to undermine your credit strength, resulting in an uphill battle correcting deficiencies.  In addition to responsible use of credit opportunities, adopt these strategies to maintain credit integrity:

  • Always pay on time
  • Utilize various forms of credit
  • Close unused accounts
  • Check your credit score annually

Select the Right Financing for the Job

Various types of financing serve non-commercial borrowers, helping people fund everything from routine daily purchases to major, big-ticket buys.  Matching the correct loan or revolving account to your funding need can save money on the cost of purchases and reinforce your financial foundation.  Using equity financing to carry-off home improvements, for example, is a sensible approach to renovation.  While relying on a high-interest credit card to pay for residential upgrades may not be prudent.

Fortunately it is easier than ever to evaluate lender rates and terms, using online resources to compare and contrast borrowing alternatives.  Your credit history, income and employment status are important considerations when vetting financing alternatives, leading you to the most cost-effective solution for each funding need.

Build a Strong Financial IQ

When it comes to money matters, knowledge is empowering – in more ways than one.  Not only does financial understanding give you peace of mind, ensuring you are making the right moves, but a well-rounded financial IQ can also have a direct impact on your bottom line.  Building and reinforcing financial savvy protects your monetary interests and  whether or not you are mathematically inclined, general accounting principles are important tools for making the most of your financial resources.  Understanding how to balance your budget, for instance, is essential for long-term financial success, resulting in a sustainable flow of cash through your home.  And knowledge of fundamentals such as depreciation, dollar-cost averaging, and APR weigh heavily on your ability to effectively manage money.  For the most consistent financial outcomes possible, use your commitment to financial understanding to make informed decisions, without leaving money on the table.

Your financial security relies on a sturdy base and ongoing discipline managing money matters.  From a high credit score to a strong financial IQ, it is up to you to use all the tools at your disposal, building and preserving a solid financial foundation.

Important Steps In Getting Your Loan Approved

Getting approved for a loan certainly isn’t the easiest process in the world. With Brexit pushing the future of the nation’s economy into uncertainty, lenders are less strict than they were during the recession of the noughties, but more strict than they have been in the past. Bottom line: it’s still very important to present a great package if you want your loan to be approved. Here are some important steps to getting your loan approved…

Review your Personal Preferences

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Before you head straight to your bank and start asking questions, spend some time researching the market, and seeing what your alternatives are. This is an essential step to ensuring you can get your hands on some of the best offers on the market. This means thinking about the type of loan you’re looking for, the terms that you can reasonably afford, and how you’re going to pay off the loan in the shortest period of time possible. When you’re looking for a specific type of loan, such as a personal loan, auto loan, or a mortgage, scouring the market and avoiding impulsively jumping at any of the offers that arrive in your email inbox, is absolutely essential to coming out on top.

Know your Limits

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From Wikimedia

When you’re pursuing a loan, it’s important to be aware of your current credit score and your history. All good lenders will tell you the bracket of credit scores required for approval for a certain loan. You can prepare in advance by requesting a copy of your credit and history a few weeks prior to your actual application. Start reviewing your history for accuracy, and make sure you have enough time for correcting any kind of errors in your history. These days, lenders put a lot of emphasis on how you’ve used credit in the past. If there are any mistakes left in your report, you may wind up with a much lower score, which can obviously hurt your chances of being approved. Always consider your personal finances when you’re planning to pursue a loan, and target deals based on your limits, and realistic ability to make repayments which you can comfortably afford.

Manage your Expectations

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We’ve said it once and we’ll say it again: rushing through the process of applying for a loan is never a good idea. Loan officers have very strict protocol to follow when they’re approving loans and getting the money to applicants. Through the entire process, you should be discussing the sequence of your events so that you’ll know what to expect moving forward. While some loans can be pre-approved right out of the gate, you may not know all the specifics until a number of weeks have passed. Ask the experts when it comes to following up. Your overarching goal should be securing a loan that you definitely have the means to repay. Getting turned down for loans can be frustrating, but it’s important to understand your situation thoroughly and manage your expectations, and not to ruin your credit by applying for loan after loan.

The Wrong Fairy Tales: Ignore These Mortgage Myths!

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Very few people are able to buy a house outright. Some people will try to make the argument that this is a problem unique to our financially-troubled times, but the truth is that we’ve rarely not lived in “financially-troubled” times where a lot of people were able to buy homes without assistance from some institution.

Banks and other lenders have been pulling the financial strings of the vast majority of homeownership for a long time, and it will probably continue to be that way for a long time yet. The fact is that, unless you’re pretty darn wealthy, you’re going to need financial assistance to get a home. Heck, even the wealthy need the assistance at times, when you consider modern house prices.

Getting a mortgage is, in all likelihood, how you’re going to get your own home. So it’s important that you’re not falling for any myths about mortgages! Here are some of the most common.

A pre-approved loan is a sure thing

Yes, you should definitely get a mortgage pre-approved before you start shopping for property. But this doesn’t mean that a pre-approved mortgage is the same thing as a mortgage! However, once you’ve made an offer on the place, the lender is going to double-check everything. After all, things may have changed between that pre-approval and the final approval. Remember that prefix: pre-approval. It’s not total approval just yet!

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A high income is all that matters

Let’s say you’ve got one person earning $100,000 a year and another that earns $50,000 a year. The first one is going to get the best mortgage rate, right? Well, not necessarily. There are a lot of factors to consider. Ms $100,000 may also be paying about $60,000 in debt every year, whereas Ms $50,000 is only paying maybe $3000 in debt. The latter has a healthier cash flow, so has the upper hand! Another thing to consider is the type of work you do. Ms $50,000 may be a scientist with a steady career ladder ahead. Ms $100,000 may be a self-employed freelancer who could potentially earn much less in the following year!

Your credit needs to be spotless

It’s true that a good credit score is highly desirable if you want a mortgage. But you’re not expected to have a perfect score. But if you have a middling score – and many people do! – then it’s not exactly a deal breaker. In general, a few blemishes won’t hurt you overall as long as you have a steady income and pay your bills.

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Image Credit Flickr and Cafe Credit

You need to have 20% saved for a down payment

20% is the amount that always gets thrown around when it comes to saving up money for a down payment on a home. And, yes, that is the best minimum to have if you want the best mortgage rates. But it’s not necessary – after all, that 20% is usually quite a lot of money. There are a lot of good institutions who will give you a mortgage with a down payment of about 5%, for example. Don’t assume you’re doomed if you haven’t saved that magical amount of 20% just yet!